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4.2.2 Unemployment Insurance
Unemployment insurance provides protection against the loss of income, and, in agreement
with the principles of the Bismarckian welfare state, also aims to secure the standard of
living in the case of unemployment. As such, it can be seen as the passive element of labour
market policy, while its active component includes diverse measures to re-train and eventu-
ally reintegrate the unemployed. Until 2004, German unemployment protection consisted of
two tiers: a first tier based on the insurance principle and financed by compulsory contribu-
tion (split equally between employers and employees) up to a certain wage ceiling (unem-
ployment insurance benefit, ALG); and a second tier with a benefit related to former earn-
ings, based on means-testing and financed by general taxation (unemployment assistance,
ALH) for those not eligible (anymore) to ALG.30 Both benefits were administered by the
Federal Employment Agency or FEA (the former Bundesanstalt für Arbeit, since 2004 re-
named Bundesagentur für Arbeit), which is a tripartite organization (governed by employer,
trade union and state representatives) subject to federal legislation. Apart from its responsi-
bility for transfers, it also oversees and finances active labour market measures and pro-
grammes. Both active and passive measures are financed from the same FEA budget and
the federal government is obliged to help in the case of deficits. This set-up of funding im-
plies three things: until recently, benefit receipt would determine the access of individuals
to labour-market measures; a pattern of crowding-out of active labour market programmes
would be encouraged when unemployment was high, increasing benefit expenditures; and
the federal government would be biased towards cost-saving by its obligation to balance
BA deficits (Clasen 1994; Reissert 2005; Clasen 2005a: 54ff.).
Compared to the field of pensions, where most institutional characteristics tend to impede
policy change, it is more difficult to detect sources of path-dependency in the institutions
regulating unemployment benefits. Rather, the issue of reform capacity (with the other side
of the coin being resilience) in unemployment systems has been approached via the degree
of institutionalisation of such systems. For instance, Siegel (2002) constructed an institu-
tionalisation index which attempts to measure the degrees of freedom for a state to embark
on reform in these unemployment arrangements. A high degree of discretionary power (and
a high score) is associated with means-tested unemployment systems (e.g. New Zealand and
Australia), while a high degree of state restrictions (and a low score) are found in social
insurance-based systems, which tend to exhibit traditions of self-governance and delegation
to corporatist actors. Germany’s arrangements resemble more closely those of Scandinavian
countries than those of Anglo-Saxon ones.
Other authors have adopted a somewhat different perspective, looking at the actor orienta-
tions of those participating in labour market policy - which includes unemployment ar-
rangements - more generally. Regarding this approach, the preferences of main interest
groups and their ability to influence policy-making can be considered as sources of resil-
30 A third unofficial tier of the system was formed by social assistance as a potential source of income for
unemployed.